Itaú BBA - Mexican assets sell off on domestic and external factors

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Mexican assets sell off on domestic and external factors

October 6, 2017

Mexican assets were under pressure from the increased prospects of fiscal stimulus in the US.

With information available until 6:30pm Brasilia time


  • Mexican assets were under pressure from the increased prospects of fiscal stimulus in the US. Domestic headlines regarding the presidential election also raised cautiousness. The MXN underperformed EMFX peers, weakening 1.15% to 18.48/USD. Likewise, 5-year credit spreads widened 2bps to 105bps and the TIIE swaps curve bear-steepened strongly (1s10s: +9bps). Linkers also went north, with the 2040 Udibono widening 5bps to 3.65%.
  • Elsewhere, the BRL erased earlier gains, closing at 3.15/USD (-0.5%). Andean pairs bucked the regional trend:  the COP strengthened 0.39% to 2,927/USD on the oil rise and the CLP appreciated 0.48% to 628.59/USD, tracking the gains in copper.

Macro Backdrop

  • According to Anfavea, auto production reached 237k in September, slightly above our forecasts (233k) and up 5.9% mom/sa (our estimate). Strong gains in both August and September have resumed the upward trend in auto production, briefly interrupted in the June-July period. The production breakdown shows light vehicles (6.6% mom/sa) drove growth, while trucks and buses lost steam (-5.3%) after a strong 1H17. Domestic sales rose further (4.8%), while exports have been stable for two months in a row (+1.1% in August followed by -0.8% in September). The positive year-over-year figures for exports (52.2%) and domestic sales (24.5%) highlight the improvement since 2016, yet the sector activity level remains substantially below the 2011-2013 highs. Inventories (relative to sales) fell and are now slightly below the historical average. We revised upward our preliminary forecast for September industrial production to 0.8% mom/sa (previously: 0.7%).
  • The monthly proxy for private consumption was solid in July, decoupling from retail sales (which weakened during the same month); the former indicator is broader than the latter, and correlates better to consumption in GDP. The monthly proxy for private consumption grew 2.9% year-over-year in July. According to calendar-adjusted data reported by the statistics institute, growth was slightly higher (3.1% year-over-year), with the three-month moving average growth rate standing at 3.6% year-over-year (from 4.2% in June).
  • Although a temporary drop is likely in September due to the disruptions caused by the earthquakes, we expect private consumption growth to recover quickly and stay robust, underpinned by the acceleration of the real wage bill and the recent improvement of consumer confidence. A recent survey conducted by the statistics institute estimated that 40% of businesses (from the states affected by the quakes) closed their doors for at least one day (and 16% of businesses in Mexico City shut down for more than three days). Therefore, it is highly likely that September will be a bad month. Nevertheless, looking beyond this temporary headwind, the growth of consumption will be supported by the acceleration of the real wage bill. In fact, inflation is already falling, and we expect employment growth to remain robust (as the acceleration of the U.S. economy supports job creation in Mexico). The presidential elections (July 2018), however, pose a risk for consumer sentiment.  Full Report
  • After hitting an all-time low in January, Mexico’s consumer confidence has been recovering gradually over the course of 2017, with a significant improvement in September. For the past months, we have argued that the recovery has been modest – considering that the level of consumer confidence was not far from the average of 2009 (80.5, when the Mexican economy was undergoing recession) – but the improvement has been sustained. In September, consumer confidence increased by 1% mom/sa, reaching the level of 88.8 (now further above the depressed levels of 2009). In year-over-year terms, seasonally-adjusted consumer confidence was up by 6% (from an average decline of 11% in 1H17). We attribute the improvement of consumer confidence to the tightness of labor market conditions, with solid formal employment, which has offset the negative effect of rising inflation. Looking ahead, we believe consumer confidence will show a more substantial improvement only in 2018, when inflation falls significantly and NAFTA renegotiation attains an acceptable compromise for all parties.
  • Growth momentum is improving in the third quarter of the year. The Imacec (monthly proxy for GDP) grew 2.4% year over year in August (2.8% in July), in line with our forecast (just below the Bloomberg market consensus of 2.7%). Once corrected for seasonal and calendar effects, growth in August was somewhat lower at 2.2% (2.5% in July). At the margin, the temporary boost in mining lifted overall growth to 7.5% qoq/saar from 3.2% in 2Q17 and 0.5% in 1Q17. Mining production accelerated to 60.6% qoq/saar (+26.0% in 2Q17 and -24.7% in 1Q17). Moreover, non-mining activity is growing at 3.9% qoq/saar, up from 1.5% in 2Q17 and 2.9% 1Q17.
  • The mining bounce back and improved non-mining activity led us to revise our growth forecast to 1.7% for this year (1.3% previously), broadly in line with the 1.6% last year. We also now forecast growth of 2.7% for 2018 (2.5% previously). A favorable global environment is boosting copper prices, while monetary policy in Chile remains expansionary. We note the outcome of the presidential election and the debate over the reform agenda next year could have an impact on confidence and investment, and consequently on growth. Meanwhile, the improved outlook for growth is in line with our updated baseline scenario that no longer includes additional monetary easing; rather, stable rates at the low 2.5% for a prolonged period.  Full Report
  • Real wage growth remained above 2.0% in August, still favoring the private consumption performance. Nominal wages increased 4.2% year-over-year in August (according to the historically merged series), versus 4.5% in July and 4.3% in 1H17. As inflation picked up to 1.9% in the month, real wage growth slowed to 2.3% year-over-year (2.7% in July and 1.7% in 1H17). The real wage bill growth picked up to 4.9% in the quarter ending in August (3.9% in 2Q17 and 3% in 1Q17), when total employment growth is considered. Meanwhile, when only salaried employment is included, growth of the real wage bill in the quarter came in at 4.0% year over year (3.5% in 2Q17 and 1.0% in 1Q17), boosted by rising public salaried employment. Real wage growth will likely stay elevated ahead as inflationary pressures remain contained.
  • In September, business confidence continued to advance towards the neutral level, recording its highest level since April 2015. Think-tank Icare’s September business confidence index posted its 42nd consecutive month in pessimistic territory (below 50), but gained 4.6 percentage points from September 2016 to reach 48.3 points (43.2 in the previous month). This was the seventh consecutive month business sentiment has been above the level recorded in the previous year. The mining sub-index remains in optimistic territory (66.2) and at the highest levels since mid-2015 as copper prices perform favorably. Commercial confidence is also still in optimistic territory at 51.6 points (from 47.8 one year ago and 50.0 in the previous month). Meanwhile, industrial confidence increased 2.0 points over the twelve-month period to 44.3 points (42.7 in August) and construction confidence rose 12.8 points to 33.3 points. Our expectation of an activity recovery into 2018 considers a confidence improvement that would lead to an upbeat investment performance. The improving confidence levels could be associated with higher copper prices, an improved outlook for the local and global economy and optimism that a political cycle change could benefit the economy.


  • Global Monetary Policy Monitor: Rate cuts in Latin America have become less widespread. In September, there were monetary policy decisions in 29 of the 33 countries we monitor, with rate reductions in 4 emerging economies and a rate hike in Canada. The number of central banks reducing interest rates remained above the number of central banks increasing the policy rate. In October, we expect the ECB to announce a reduction in the pace of QE purchases from EUR 60 billion to 40 billion per month in the first half of 2018. In Latin America, well-behaved exchange rates and spare capacity still leave room for monetary easing. In Brazil, we expect a moderate reduction in the easing pace, from 100-bp in September to 75-bp in October, in line with the BCB's recent communication. We also expect an additional 25-bp rate cut in Peru, ending the easing cycle. In Argentina, Chile and Colombia, we expect the central banks to maintain the policy rate.

Market Developments

  • GLOBAL MARKETS: On the eve of the US payrolls report, equities rallied and the VIX reached the all-time low of 9.19% amid increased expectations of tax cuts in the US. The US Senate Budget committee approved the budget resolution for fiscal year 2018, whose terms would allow for up to USD 1.5 trillion worth of tax cuts. The bill moves now to the Senate’s Floor, which is expected to vote in two weeks (next week in recess). The House of Representatives has also passed its own version of the Budget Resolution, so after the Senate floor, the next step will be the House and Senate conference to approve a final version (late-Oct). And, then in early November, House Ways and Means Committee should start writing the Tax Bill.  Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices rebounded (WTI: 1.59% to 51.12/USD), amid headlines on Saudi Arabia’s king official visit to Russia. King Salman signaled a desire to maintain the output caps implemented in the agreement reached between Opec and non-Opec producers. Metallic commodities were also on the green, as copper (+2.81%) rallied to 4-week highs. In FX, the USD gained more ground (DXY: +0.54%), amid increased market prospects of fiscal stimulus in the US. The MXN underperformed (-1.15% to 18.48/USD) within EMFX, while the BRL erased earlier gains, closing at 3.15/USD (-0.5%). Andean pairs bucked the regional trend:  the COP strengthened 0.39% to 2,927/USD on the oil rise and the CLP appreciated 0.48% to 628.59/USD, tracking the gains in copper.  FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Brazilian and Colombian credit spreads (5-year) inched down 1bp to 185bps and 113bps, respectively. Chile’s CDS stood at 55bps, whereas Mexico’s rose 2bps to 105bps, on the local political news flow.  External Bonds & CDS Tracker
  • LOCAL RATES – Brazil: Long-dated nominals widened by double-digit figures, whereas the front end remains anchored. In DI futures, the Jan-27 went up 13bps to 10.28% (a five-week high). Linkers widened by much less (2bps past the 2030s).  Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican curve bear steepened massively (1s10s: +9bps), pressure by rising US yields and the MXN sell-off. In TIIE swaps, the 10-year rose 12bps to 7.28%. Linkers also went north, with the 2040 Udibono widening 5bps to 3.65%. Mexico Rates Tracker 
  • LOCAL RATES – Chile and Colombia: Andean rates were mixed. Camara swaps traded in ranges (2-year: +1bp to 2.85%), Chile Rates Tracker while the front end of the IBR swaps curve was broadly unchanged (2-year: 4.81%).  Colombia Rates Tracker

Friday Events

  • In Brazil, all eyes will be on the IPCA consumer inflation. We project September’s IPCA to register a 0.10% monthly increase, with year-over-year inflation stable at 2.5%.
  • In Chile, the INE will publish inflation for the month of September. We expect consumer prices to have gained and atypically low 0.2% from August, leading to an annual inflation of 1.9% in the month.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza

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